Download Urban Land Institute Real Estate Capital Markets 2012

Urban Land Institute Real Estate Capital Markets
Real Estate Finance in 2014:
Return to Normalcy
1
Urban Land Institute Real Estate Capital Markets
2
Urban Land Institute Real Estate Capital Markets
2007: The “Beginning of the End”
“…the end of an economic illusion, facilitated by a
bubble, built on a delusion, perpetuated by greed,
living on both borrowed time, and borrowed money”
3
Urban Land Institute Real Estate Capital Markets
We Told Ourselves: “This Time It’s Different”
U.S. housing bust pushed global economy into recession
Rental demand for commercial real estate “evaporated”
Federal Reserve flooded capital markets with liquidity,
driving interest rates to near zero
U.S. government brokered mergers of shaky financial
institutions (J.P. Morgan/Bear Sterns; B of A/ML)
U.S. government bailed out AIG, let Lehman fail, and
allowed Goldman Sachs, Morgan Stanley, America
Express, MetLife, et al to convert to bank structures and
thereby qualify for bailout money
4
Urban Land Institute Real Estate Capital Markets
We Told Ourselves: “This Time It’s Different” (continued)
Overall, largest government intervention into the financial
system and capital markets…ever
To date, solutions have been short-term in nature with no
evidence of a long-term, systemic plan
What was initially a liquidity crises became a crises in
confidence as “civil discourse” between political parties
seemed impossible
5
Urban Land Institute Real Estate Capital Markets
Real Estate Finance 2012:
New Realities
6
Urban Land Institute Real Estate Capital Markets
“Two Speeches for Audience to
Chose From”
For Speech A, text “A” to: 4-5-6-6-6 *
For Speech B, text “B” to: 3-6-6-6 **
* 4-5-6-6-6 spells “gloom”; ** 3-6-6-6 spells “doom”
7
Urban Land Institute Real Estate Capital Markets
tenuous
ten∙u∙ous
[ten-yoo-uhs]
-adjective
1.
2.
3.
4.
5.
thin or slender in form, as a thread.
lacking in sound basis, as reasoning; unsubstantiated; weak: a tenuous
argument.
thin in consistency; rare or rarefied.
of slight importance or significance; unsubstantial: He holds a rather
tenuous position in history.
lacking in clarity; vague: He gave a rather tenuous account of his past
life.
8
Urban Land Institute Real Estate Capital Markets
2012: Between Uncertainty
and Extreme Uncertainty
9
Urban Land Institute Real Estate Capital Markets
Becoming Resigned to Uncertainty
10
Urban Land Institute Real Estate Capital Markets
Emerging Trends in
Real Estate 2013:
“Recovery Anchored in Uncertainty”
11
Urban Land Institute Real Estate Capital Markets
12
Urban Land Institute Real Estate Capital Markets
“Signposts for 2013…First Thoughts”
The 21 century became a teenager in 2013,
and as with any young adolescent, it kept odd
hours; tough issues seemed to get pushed off; and
there were likely to be wild highs and lows
13
Urban Land Institute Real Estate Capital Markets
14
Urban Land Institute Real Estate Capital Markets
{au: ? or !}
Real Estate Finance in 2014:
Return to Normalcy
15
Urban Land Institute Real Estate Capital Markets
16
Urban Land Institute Real Estate Capital Markets
“If you laid all the economists end-to-end, they would never
reach a conclusion”
George Bernard Shaw
“It has been said that the only purpose of economic forecasts
is to make astrology look respectable”
Anonymous
17
Urban Land Institute Real Estate Capital Markets
Federal Open Market Monetary Policy
In December 2013, the FOMC began winding down its QE
program by reducing asset purchases from $85 billion to
$75 billion per month
The Fed also strengthened its forward interest rate
guidance, making this a “Dovish Taper”
Policymakers noted that the fed funds rate would remain
“at rock bottom levels well past the time the
unemployment rate fell below 6.5%”
All-in, interest rates should remain at historical low levels
through yearend 2014
18
Urban Land Institute Real Estate Capital Markets
Federal Reserve Board Beige Book
Showed economic activity expanded at a modest to moderate
pace across Federal Reserve districts from mid-November
through early January
In the real estate sector, home sales ended the year higher
than a year earlier in most districts as momentum slowed in
several districts
Residential construction was generally stronger, led by
multifamily construction
Conditions were mixed for commercial real estate markets
Commercial real estate construction is on the increase
broadly, and the outlook for 2014 is generally positive
19
Urban Land Institute Real Estate Capital Markets
U.S. economy: what to watch for
Risk spreads – narrower and steady
Inventories – building up in line with increased output
New factory orders – increasing, especially for capital
goods
Unemployment claims – increased post-Sandy; now
declining
Building permits – increasing moderately for single family
residential and reluctantly for commercial real estate
20
Urban Land Institute Real Estate Capital Markets
2011
Defensive strategies; focus on core markets; multifamily
favored property class
2012
Continued focus on core markets/property; slowing cap rate
compression; commercial real estate yields remain
attractive
2013
Core markets and property becoming “too pricey”; focus
turns to secondary/tertiary markets and overlooked sectors
as values in many markets have returned to 2006-2007
“high-water” mark
21
Urban Land Institute Real Estate Capital Markets
Say “Goodbye to 2013”
Continued improvement in fundamentals in all food groups
Property sales volume increasing
Vacancy rates down or declining
Equity and debt capital available from array of sources
Development activity is cautiously increasing
Federal Reserve began to “taper” bond purchases
22
Urban Land Institute Real Estate Capital Markets
Say “Hello to 2014”
The Real Estate Roundtable Sentiment Index
Views of CEO, President, and other top officers regarding
current conditions and future outlook on real estate
conditions, capital markets, and asset pricing
Participants note continued improvement in fundamentals, but remain
cautious due to slow pace of economic recovery
New construction and an increased tolerance for risk suggest optimism
beyond the core “gateway” markets and multifamily sectors
Rising interest rates could undermine improvements in NOI,
potentially putting renewed downward pressure on asset values
For now, the strong availability of capital (increasingly flowing to
riskier transactions) is helping to offset the recent run-up in long-term
interest rates
23
Urban Land Institute Real Estate Capital Markets
Say “Hello to 2014” (continued)
Numerous “players” in the equity, debt, and property markets
Some think “Too many people, too many dollars, too few
deals”
Some argue “we’re in a precarious position with the wind
at our backs and capitalization and interest rates down…”
for the moment and NOIs growing…slowly
Others caution “we’re in a precarious position with the
wind in our faces, NOI growth “slack”, interest rates and
cap rates ready to increase, and new supply on its way
Properties are “priced to perfection” or “priced to
disappoint”
Too many people are focused on “buying yield, not
creating yield”
24
Urban Land Institute Real Estate Capital Markets
“Logistics”,i.e., Fundraising
Remains challenging for the majority of private real estate
fund managers
Results indicate you need to be “big and global” or a
“nimble and a local sharpshooter”
Key factor investors consider include: track record (32%);
experience (30%); returns (27%); strategy (18%); risk
profile (18%); and fees (14%)
Largest domestic and foreign institutional investors,
wanting greater control over investments, are focusing on
direct investments, joint ventures, and other forms of
structured transactions
25
Urban Land Institute Real Estate Capital Markets
Real Estate Equity Capital Markets
26
Urban Land Institute Real Estate Capital Markets
Property Transaction Trends
As of 3Q2013, transaction volume equaled $293+/- billion,
27% ahead of 2012
Multifamily remains in the “wonder” zone with investor’s
wondering if too much is under construction and if pricing
is sustainable
Investors appear to be rotating to higher yielding, higher
risk plays such as hospitality, retail, and niche property
types
Geography continues to expand to include formerly
overlooked secondary and tertiary markets
27
Urban Land Institute Real Estate Capital Markets
$600.00
$570.70
$500.00
$415.50
$400.00
$359.00
$315.00(e)
$300.00
$283.20
$229.20
$209.90
$200.00
$100.00
$171.70
$129.50
$104.70
$88.30
$142.60
$66.20
$2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Transaction Volume
28
Urban Land Institute Real Estate Capital Markets
Ranking of Investment Categories and Strategies
Value-added Investments
Development
Opportunistic Investments
Core-Plus Investments
Core Investments
Distressed Properties
Distressed Debt
29
Urban Land Institute Real Estate Capital Markets
Real Estate Investment Trusts
Continue to enjoy broad access to capital from many public
and private sources including common/preferred equity,
unsecured debt, and balance sheet lenders
Continuing to recycle lower tier assets, supported by
increasingly active CMBS market
REIT conversions for non-traditional assets such as
infrastructure, billboards, correctional facilities in process
Dividend yields and valuations remain attractive
Non-Traded REITs having another record year
30
Urban Land Institute Real Estate Capital Markets
Real Estate Debt Capital Markets
31
Urban Land Institute Real Estate Capital Markets
Debt Sources
“New and improved CMBS”, a.k.a. CMBS 2.0 is taking
market share from competitors
CMBS’s ability to process B and C quality property in
secondary and tertiary markets is a competitive advantage
not lost on borrowers
CMBS 2.0 has also learned to compete with commercial
banks and insurance companies for mandates on core
property in primary markets
No new credible source has entered the market since the
end of the current crises as spreads are only marginally
attractive compared to alternative investments
32
Urban Land Institute Real Estate Capital Markets
33
Urban Land Institute Real Estate Capital Markets
Cumulative Distress for All Property Types
34
Urban Land Institute Real Estate Capital Markets
10-Year, 50%to 59% Loan-to-Value
Sector
1/4/2013
(in Basis Points)
12/13/2013
(in Basis Points)
Change
(in Basis Points)
Office
210
162
-48
Retail
192
160
-32
Multifamily
182
157
-25
Industrial
191
159
-32
Average
194
160
-34
1.86%
3.04%
+1.18%
10-Year Treasury
Bonds
35
Urban Land Institute Real Estate Capital Markets
CMBS Issuance: 1995 – 2014 (Projected)
$250,000
$200,000
$150,000
$100,000
$50,000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2013
2014
$0
U.S. ($Mil.)
Source: Commercial Mortgage Alert.
36
Urban Land Institute Real Estate Capital Markets
Commercial Banks
Against a backdrop of deleveraging and reduced exposure to
acquisition, development, and construction lending
2011: commercial banks started to test the water
2012: commercial banks began to put their toes in the
water
2013: switch from loan resolution to loan origination
2014: anticipated profitability will allow increase in
originations and growth of loan book
37
Urban Land Institute Real Estate Capital Markets
Life Insurance Companies
Will face stiffer competition in 2014 from both commercial
banks as well as securitized lenders
Insurers “fighting back” with tighter loan spreads, higher
leverage, and less recourse
Industry worries about a “race to the bottom” in the
application of credit standards
Originations expected to equal $50 billion, long-term run rate
for insurers
38
Urban Land Institute Real Estate Capital Markets
Debt Funds
Developed to fill lender gap
Provides higher yields than equity with (hopefully) less
risk
Not the savior everyone expected…as yet
Over time, may grow from niche player to important
part of the capital stack
Will need to develop its own infrastructure
Focused on institutional size property and “Best of Breed”
borrowers
Global geographic focus: U.S.; Japan; UK, Europe
39
Urban Land Institute Real Estate Capital Markets
40
Urban Land Institute Real Estate Capital Markets
“Prediction is very difficult, especially if it’s about the future”
Economy continues to “grind it out”
Interest rates “flat” through 2014
Real estate fundamentals continue to improve, benefitting
from improving economy and little new construction
Transaction volume increases from $325 billion in 2014
Fundraising remains challenging
Competition for investments increases; buyers resort to
“hand-to-hand” combat
41
Urban Land Institute Real Estate Capital Markets
REITs remain ferocious competitors
Pension will increase allocations
Foreign investors focus on core assets in gateway markets
(and political and physical safety)
Mortgage capital “abundant and cheap”
Mortgage delinquencies continue to decline
Refinancing dealt with promptly
Commercial banks: originations equal to $150 billion
CMBS: originations total $90 billion to $100 billion
Insurance: originations reach $50 billion
42
Urban Land Institute Real Estate Capital Markets
Urban Land Institute Real Estate Capital Markets
“Best Bets”
Infill locations in 24-hour markets
Develop industrial property in hubs near ports and airports
Develop multifamily property…carefully
Scour the secondary and tertiary markets
Single family housing funds…maybe
Buy and hold REITs
Non-performing mortgage loans (if you can get any)
Anything with an “R” in it: refinance; renovate; re-position;
rehabilitate; re-lease; restructure; recapitalize; etc.
The “Age Game”: seniors, students, and medical office
Distressed: think Europe
Food trucks: combine social media and prime locations
44
Urban Land Institute Real Estate Capital Markets
“If it looks like a bubble, and floats like a bubble…
Summer 2013: inflection point or the pause that refreshes?
“Priced to perfection” or “Priced to disappoint”
Let’s role play for a minute; I’ll be the buyer and seller and
the lender and the borrower
45
Urban Land Institute Real Estate Capital Markets
Real Estate Finance in 2014:
Return to Normalcy
46